Book Review: Governance and Risk Management in China

It is axiomatic in the current global economy that every business needs to have a China strategy. Most business enterprises are drawn to the world’s most populous country and second-largest economy. But while China represents an attractive business marketplace, it can also in many respects be a perilous place to try to do business, particularly from a regulatory and compliance standpoint. While most businesses may recognize these challenges, many may struggle to try and address the concerns. A new book entitled “Governance, Risk and Compliance Management in China” (here), which I review below, may provide substantial help to companies trying to address compliance concerns arising from doing business in China. Of particular interest to this blog’s readers, the book includes an interesting chapter on D&O insurance issues in China.

An important part of preparing to address the compliance concerns associated with doing business in China is identifying the specific areas of risk. The opening segments of this book walk through the areas of greatest concern, including in particular anti-corruption and antitrust regulation and enforcement. The book’s discussion of anti-corruption enforcement is particularly detailed and interesting, as it addresses the legal issues that might arise from doing business in China under several different legal regimes, including in particular under the anti-corruption laws in the United States and the U.K., as well as under the laws of China itself.

The book is particularly useful in setting out a practical framework for corporate governance and risk prevention strategies in China. While the book’s approach to these issues within the Chinese context arguably has much in common with consideration of these issues in any environment, the book’s discussion gives particular attention to the specifics of the issues in the context of the Chinese legal environment and culture.

Of particular interest to this blog’s readers, the book includes a chapter on D&O insurance in China. The D&O insurance chapter was written Burkhard Fassbach and Michael Hendricks of Hendricks & Partner, who many readers will recognize guest blog post contributors to this site. The authors note that D&O insurance “is still in an early phase” in China and that even among publicly traded Chinese companies only a very small percentage currently purchases D&O insurance.

The authors open their discussion with a review of the regulatory and practical issues involved in the question of whether or not companies doing business in China should implement a locally admitted policy as part of the D&O insurance program; they conclude based on the various factors that “the best insurance solution seems to be the installation of a local policy in China.”

After a lengthy discussion of the differences between the U.S. and German governance structures and liability regimes, the authors then examine the Chinese liability regime for corporate managers, noting that while the Chinese system draws both on other civil law systems (including Germany), “Chinese jurisprudence heavily absorbed experience from the U.S. and U.K. legal systems to protect the company, its shareholders and any third party from damage inflicted by the D&Os.”

With respect to the issue of indemnification, the authors note that “written law remains silent,” though written indemnification agreements are likely to be permissible. D&O insurance, the authors note, is permissible. The authors also note that the Chinese insurance marketplace includes insurance products specifically addressed to certain business risks; the products include cyber insurance, IPO insurance, M&A insurance for representations and warranties, and EPL insurance.

Though the Chinese insurance market is “still in at its early beginning of development,” due to increasing globalization and other factors, it can be “expected” that in the future “litigiousness will rise, too.” For that reason, the authors note, it will increasingly important for Chinese companies to secure insurance structured to address their business risks.

In addition to the chapter on D&O insurance, the book includes a review of the business risks involved with other types of regulatory compliance, including with respect to environmental risks. The book also addresses the risk management issues related to internal controls and fraud prevention, and a separate chapter discusses the risk management concerns with M&A transactions. The book concludes with separate chapters discussing the risk management issues specific to the automotive and pharmaceutical sectors.

Many thanks to Burkhard Fassback and Michael Hendricks for the opportunity to review this very helpful book.

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